Banca Naţională a României

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The annual inflation rate advanced to a slightly higher-than-projected 0.64 percent in May 2017, after resuming in April the growth that had been discontinued in March 2017 (0.61 percent, against 0.18 percent). Behind this stood chiefly the step-up in core inflation and the slower negative growth of administered prices, as well as the rise in volatile food prices. The effects of these determinants were partially offset by the impact of slower annual fuel price dynamics, amid a renewed decline in the global oil price.

Annual adjusted CORE2 inflation rate¹ rose slightly above the projected level, coming in at 1.29 percent in May 2017, the highest reading since August 2013, from 1.1 percent in April and 1.03 percent in March, largely on the back of movements in processed food prices.

Average 12-month CPI inflation further posted less negative values, standing at -0.2 percent in May, against -0.5 percent in April and -0.9 percent in March; calculated based on the Harmonised Index of Consumer Prices, the annual average re-entered positive territory after nearly two years to reach 0.1 percent (compared with -0.2 percent in April and -0.5 percent in March).

Economic growth sped up significantly in 2017 Q1, above expectations, with real GDP expanding year on year by 5.7 percent, against the previous three months’ 4.8 percent. Swifter GDP dynamics were fully accounted for by domestic demand, which went up on the back of both its components: final consumption of households (6.7 percent, contributing 4.8 percentage points to GDP growth) and gross fixed capital formation (whose negative contribution shrank to -0.1 percentage points, from -3.8 percentage points in the prior quarter). By contrast, the contribution of net exports to GDP growth slipped again into negative territory, as the faster annual pace of imports outran that of exports of goods and services, which hit a 3-year high.

On the supply side, the major driver of first-quarter economic activity advance was the industrial sector, whose annual pace stood 6.7 percent higher, ahead of the tertiary sector, up 5.9 percent, that remained the largest contributor to GDP growth (3.6 percentage points).

The most recent statistical figures (available for the beginning of 2017 Q2) point to a further sizeable pace of increase of turnover of trade and services, a slight alleviation of the annual dynamics of industrial output volume (but to a large extent attributable to a calendar effect) and a steeper fall of activity in the construction sector. Against the backdrop of a widening differential between the growth rate of wage earnings and that of labour productivity, April saw a renewed rise in the annual pace of increase of unit wage costs industry-wide.

Real monetary conditions remained stimulative in 2017 Q2. The annual growth of credit to the private sector continued in May 2017 at a rate similar to that seen in April, i.e. 3.2 percent. The halt in the upward trend recorded previously was attributable to a slight deceleration in the annual dynamics of credit to non-financial corporations and the renewed pick-up in the pace of increase of loans to households, consumer credit in particular. The share of leu-denominated credit in total private sector loans continued to widen to 59.3 percent (from a low of 34.6 percent in May 2012), amid further divergent developments in the two components (up 13.3 percent for lei and down 8.7 percent for foreign currency in May). This certifies the improvement in monetary policy transmission, while also helping mitigate risks to financial stability.

The latest assessments reconfirm the outlook for the annual inflation rate to stick to an upward path in the near future, while following a trajectory slightly above that projected in the medium-term forecast published in the May 2017 Inflation Report, including in the case of the annual core inflation rate. The uncertainties and risks surrounding this outlook are, however, influenced by both domestic and external developments.

Domestically, they are compounded by the fiscal and income policy stance, also in the context of the recent legislative initiatives in the area. Looking at the external environment, further relevant are the uncertainties and risks associated with euro area and global economic growth, especially amid Brexit talks and the US Administration’s economic policies, as well as with the decisions of the major central banks (ECB, Fed).

Given the current assessments, as well as the emergence of new sources of uncertainty, the Board of the National Bank of Romania decided to keep unchanged the monetary policy rate at 1.75 percent per annum, to further pursue adequate liquidity management in the banking system, and to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

The NBR Board decisions aim to ensure and preserve price stability over the medium term in a manner conducive to achieving sustainable economic growth. The NBR Board reiterates that a balanced macroeconomic policy mix and progress in structural reforms are of the essence in preserving a stable macroeconomic framework and strengthening the capacity of the Romanian economy to withstand potentially adverse global developments.

The NBR is closely monitoring domestic and external developments and stands ready to use all its available tools.

The account (minutes) of discussions underlying the adoption of the monetary policy decision during today’s meeting will be posted on the NBR website on 10 July 2017, at 3:00 p.m.

In line with the announced calendar, the next monetary policy meeting of the NBR Board is scheduled for 4 August 2017, when a new quarterly Inflation Report is to be examined.

¹ Calculated by excluding from the consumer price index the following categories: administered prices, volatile prices, and tobacco and alcoholic beverage prices.